April 7, 2017 / 8:49 PM / 4 months ago

Fitch Affirms Zions Bancorp at 'BBB-'; Ratings Withdrawn

(The following statement was released by the rating agency) CHICAGO, April 07 (Fitch) Fitch Ratings has affirmed and withdrawn the ratings for Zions Bancorp (ZION) and its principal banking subsidiary Z.B., N.A. (ZBNA) including the companies' Issuer Default Ratings (IDRs) of 'BBB-'. The ratings were withdrawn with a Positive Outlook. As communicated on March 6, 2017, the ratings are being withdrawn for commercial reasons. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT Fitch revised ZION's Rating Outlook to Positive from Stable in October 2016. For additional information on that rating action please see the press release titled, 'Fitch Affirms Zions at 'BBB-/F3'; Outlook Revised to Positive'. The Positive Outlook reflected Fitch's observation that management had continued to make notable progress in addressing the company's strategic objectives which was expected to lead to persistently improved core earnings over the rating time horizon which was 12-24 months. Today's rating affirmation reflects ZION's sustained, solid franchise in the Western United States, its strong liquidity and funding profile and maintenance of adequate capital. ZION's rating are lower than its peers' and toward the lower end of its long-term rating potential due to the company's continued weak earnings performance and, relatively limited company profile. ZION's adjusted efficiency ratio (which takes out debt extinguishment costs, gains and losses from sales of investments, etc.) has improved from 69.6% at fourth quarter 2015 (4Q15) to 64.5% at 4Q16. Fitch would expect this level to come down further throughout 2017 as additional efficiencies are found and revenue is bolstered by modest loan growth, additional securities purchases and rate hikes. Fitch believes this progress has been made while not increasing risk appetite. Moreover, the Positive Outlook reflects Fitch's expectation that asset quality issues related to the energy sector should continue to be manageable. Energy-related credits made up around 5% of total loans at 4Q16, one of the highest levels in the large regional peer group. Moreover, loans to oil field service companies which have experienced larger loss rates through this cycle, make up over a quarter of the energy-related book, an outsized level relative to peers. Depressed oil and gas prices have pushed energy-related nonaccruals to 13.6% of the energy book at 4Q16, up from 2.5% a year prior. Over the last five quarters, net charge offs (NCOs) within the portfolio have averaged 5%. Excluding energy, asset quality has been strong with NCOs of just $1 million in 2016, an unsustainably low level. Moreover, while the total volume of nonperforming assets (inclusive of accruing troubled debt restructured) has increased 31.4% year-over-year, non-energy-related NPAs have continued their steady descent. Fitch's expectation that overall credit costs and NPAs will remain manageable is incorporated into today's affirmation as well as the Positive Outlook. Fitch views capital levels as adequate in light of the company's current rating, balance sheet composition and earnings performance. ZION had the second highest CET1 ratio at 4Q16 within the peer group. The company once again passed its annual regulatory stress test on both quantitative and qualitative grounds. Still, Fitch views stress testing results as indicative of the company's on balance sheet risk as well as its weak earnings performance and earnings profile. Capital erosion under the severe adverse scenario has been the highest of all larger regional peers for three years straight. In Fitch's view, these results point to the need of having higher than average capital going forward. This expectation is incorporated into today's rating action. ZION continues to have a strong liquidity and funding profile which supports its rating. At 4Q16, its loan-to-deposit ratio stood at 80%, well below the peer median. It also has one of the lowest levels of wholesale funding dependence and highest levels of noninterest bearing deposits to total deposits relative to peers, both credit positives. This funding profile has resulted in deposit costs historically below peer averages and is the result of ZION's strong commercial and small business banking franchise within its core markets. SUPPORT RATING AND SUPPORT RATING FLOOR ZION has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, ZION is not systemically important, and therefore the probability of support is unlikely. Issuer Default Ratings (IDRs) and Viability Ratings (VRs) do not incorporate any support. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES ZION's subordinated debt is notched one level below its VR of 'bbb-' for loss severity. ZION's preferred stock is notched five levels below its VR, two times for loss severity and three times for non-performance, while ZION's trust preferred securities are notched four times from the VR (two times from the VR for loss severity and two times for non-performance). These ratings are in accordance with Fitch's criteria and assessment of the instrument's non-performance and loss severity risk profiles and have thus been affirmed due to the affirmation of the VR. LONG- AND SHORT-TERM DEPOSIT RATINGS ZION's uninsured deposit ratings are rated one notch higher than its IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY ZION's IDR and VR are equalized with those of its operating companies and banks, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. RATING SENSITIVITIES IDRS, VR AND SENIOR DEBT Rating sensitivities are no longer relevant given today's rating withdrawal. SUPPORT RATING AND SUPPORT RATING FLOOR Rating sensitivities are no longer relevant given today's rating withdrawal. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Rating sensitivities are no longer relevant given today's rating withdrawal. SUBSIDIARY AND AFFILIATED COMPANIES Rating sensitivities are no longer relevant given today's rating withdrawal. Fitch has affirmed and withdrawn the following ratings: Zions Bancorporation --Long-Term IDR at 'BBB-'; Outlook Positive; --Short-Term IDR at 'F3'; --Viability Rating at 'bbb-'; --Senior unsecured debt at 'BBB-'; --Subordinated debt at 'BB+'; --Short-term debt at 'F3'; --Preferred stock at 'B'; --Support Rating at '5'; --Support Floor at 'NF'. Z.B., NA --Long-Term IDR at 'BBB-'; Outlook Positive; --Short-Term IDR at 'F3'; --Viability Rating at 'bbb-'; --Long-term deposits at 'BBB'; --Short-term deposit at 'F2'; --Support Rating at '5'; --Support Floor at 'NF'. Zions Institutional Capital Trust A --Preferred stock at 'B+'. Contact: Primary Analyst Bain K. 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